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Are You Vulnerable to a Lawsuit From Your Past? (Claims-Made Vs. Occurrence Liability Policies)

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Not all construction liability coverage is created equal. In fact, there are some important things you should know about structuring your insurance coverage to provide maximum protection. Consider:

Suppose you began operating as an independent contractor years ago with little more than a truck, some tools and a dream. It was a year or two, though, before you understood the requirements and sought liability coverage. But you have it now - you bought it a year ago

Tomorrow, your attorney informs you that you have been served with a notice of a lawsuit against you. It seems you have been accused of damage to someone's yard during some digging you were involved in two years ago.

Does your policy protect you?
It depends.

Claims-Made Coverage Basics
If you have a "claims-made" policy, it means that policy will protect you against claims made due to events that happened between specific dates. Ordinarily, then, a claims-made policy you bought 'off the shelf,' will not provide you with protection against torts (that is, alleged mistakes or negligence on your behalf that caused someone else damage for which they can sue) that occur prior to the insurance policy went into force.

So unless you make other arrangements in advance, if you were operating "naked" for a while - that is, without coverage, you didn't and you later get coverage, you still have a window of exposure - anything you did or failed to do that may have caused damage to someone else could potentially generate a claim against which you have no protection

These kinds of policies are flexible, however, and the start date on a policy is negotiable.

To minimize your exposure, talk with your agent about backdating your policy to the very earliest date you could potentially have generated a claim.

Occurrence Policies Basics
An occurrence policy provides coverage against lawsuits that occur while the policy is in effect, regardless of the coverage at the time of the incident. When you have an occurrence policy, it will cover you against claims arising from prior events, provided you keep the coverage in force. There is no need to pay extra for a retroactive start date.

Advantage of Occurrence Policies
While an occurrence policy may initially appear more affordable, at first blush, it is frequently cheaper than a similar claims-made policy with a retroactive start date. Occurrence policies also don't need a 'tail date.' Your occurrence policy will still provide coverage against events that occurred while the policy was in force. However, this coverage is built into the premium, which adds to the cost.

With a claims-made policy, on the other hand, you will usually need to pay extra for a separate rider to provide "tail cover

Advantages of Claims-Made Policies
A claims-made policy frequently shows a much lower initial premium. This is because claims -made policy generally is priced very low, early in the lifespan of the policy. Premiums then gradually increase over a five year period, depending on your claims experience.

If you get your coverage right away, and you have few or no claims, relative to others in your industry, a claims-made policy may be the best option for you. Otherwise, you may want to go with occurrence.

Your neighborhood independent insurance agent can walk you through the different considerations and weigh your options.

Click here to return to Amity Insurance E-Newsletter June 16, 2012.